Why Big Oil will compromise in Iraq

02 July 2008
There is no question that Baghdad needs the expertise and capital of international oil companies to kick-start its oil industry.

Thirty years of war, sanctions and poor government have left the country's oil infrastructure in tatters.

Despite having the world's third-largest proven oil reserves, Iraq's production of 2.5 million barrels a day is only the 12th biggest. And although production has recently recovered to the levels seen before the 2003 US-led invasion, it is still about 1 million barrels a day below its peak in the late 1970s.

What is at stake now is how it revives its oil industry and the role that Big Oil will play.

If it was left to the oil companies and their political supporters in the West, they would be quickly granted a share of Iraq's oil in return for heavy investment in the country.

But most Iraqis are unhappy with this formula. They don't agree that Iraq should give away its principal asset to foreign companies. Instead, they feel that the role of the international oil companies should be limited to that of contractors paid a fee to carry out work.

For almost two years, Washington and the large international oil companies have been cajoling, encouraging, and even threatening Iraqi Prime Minister Nouri al-Maliki and oil minister Hussain al-Shahristani to deliver an oil law that will allow them back into the country on long-term agreements that give them a share of any oil produced.

But despite this heavy pressure, or possibly even because of it, Baghdad's parliament is no closer to passing an oil law that would allow such deals.

The law, which still exists only in draft form, sets out who is responsible for exploring and developing Iraq's oil fields, and how its oil revenues will be shared between the provinces.

Baghdad wants federal authority over the exploitation of its oil fields, which are mostly in the autonomous Kurdish region in the north or the Shia-dominated south.

In particular, it wants authority over the signing of deals with foreign oil companies. The provincial administrations, however, particularly the Kurdish Regional Government (KRG) in Irbil, want control over oil reserves in their territory.

In the past year, the KRG has signed 20 deals with international oil companies to explore for oil in Iraq's northern region.

With some 80 per cent of Iraq's oil production coming from fields in the Kurdish north or Shia south, the central government in Baghdad has to tread carefully and has found itself unable to force through a deal.

The issue is central to the future shape of the Iraqi state. But with every day that passes, the country is missing an opportunity to take advantage of the high oil prices that would deliver much-needed funds to rebuild its economy.

With little prospect of a new oil law being agreed by parliament any time soon, Baghdad is now seeking other ways to develop its oil industry.

The current plan is to award a series of short-term services agreements to a select group of the world's biggest oil companies to upgrade its existing infrastructure, and the parallel launch of an auction for eight licences to redevelop some of its ageing oil and gas production facilities.

Although the plan will give international oil companies a foothold in the country, and will stimulate investment in Iraq's oil infrastructure, it is a compromise and, although it is in the nature of compromises to leave everybody slightly unsatisfied, there are also reasons to be optimistic.

After five years of relentless violence and bloodshed, the news coming out of Iraq, for one day at least, was about business deals rather than bombs. That was good for Iraqis, who long for their country to return to normality.

But the deals in question are also extremely good news for the rest of the world, which is struggling with soaring energy costs.

Investing in a revival of Iraq's oil industry offers the best hope of containing those high oil prices by boosting the supply of oil.

With proven reserves of about 115 billion barrels, Iraq is third only to Saudi Arabia and Iran in terms of oil reserves in the ground. But it has the potential to eclipse even those two oil giants.

Iraq's undeveloped fields could contain more than 250 billion barrels of oil reserves, according to some estimates.

Optimists in Baghdad claim they could contain as much as 350 billion barrels - more even than Saudi Arabia's 264 billion barrels.

In addition, Iraq has enormous potential as a gas supplier with its proven reserves of about 112 trillion cubic feet likely to represent only a fraction of what exists.

Iraq is one of the few countries with the potential to bring a large volume of new production to the market within a relatively short period of time. This additional supply would be likely to bring down prices.

Iraq's geology is relatively straightforward compared with other countries, which makes it easier to bring Iraqi oil out of the ground.

The rehabilitation of the country's existing fields and the development of the new fields would be a significant step in easing global concerns about a lack of oil supply.

Baghdad is right not to agree a deal at any cost and, given the scepticism in Iraq about why the US invaded the country, giving US oil majors a share of its oil is politically a very hard sell.

Although the deals under discussion do not give international companies the production sharing concessions they are desperately seeking, they do give them a foothold in a country of enormous potential.

For now, it seems the right sort of compromise.

This article was written for the BBC and can also be seen on the BBC website at: http://news.bbc.co.uk/1/hi/world/middle_east

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